SECOND AMENDMENT TO REIMBURSEMENT AGREEMENT

THIS SECOND AMENDMENT TO REIMBURSEMENT AGREEMENT (this “Second Amendment”), effective as of January 19, 2010, is made and entered into by and between Smart Online, Inc., a Delaware corporation (the “Company”), and Atlas Capital SA, a Swiss business organization (“Atlas”).

WITNESSETH:

WHEREAS, in connection with that certain Loan Agreement between the Company and Wachovia Bank, NA (“Wachovia”) dated as of November 10, 2006 (the “Wachovia Loan Agreement”), Atlas directed HSBC Private Bank (Suisse) SA, a Swiss business organization (the “Letter of Credit Provider”), to issue an irrevocable, direct-pay letter of credit to Wachovia (the “Wachovia Letter of Credit”) as security under the Wachovia Loan Agreement;

WHEREAS, the Company and Atlas entered into a Reimbursement Agreement dated as of November 10, 2006 (the “Original Reimbursement Agreement”), pursuant to which the Company agreed to reimburse Atlas in the event any amount was drawn and paid under the Wachovia Letter of Credit;

WHEREAS, the Company terminated the Wachovia Loan Agreement and indefeasibly paid in full all obligations thereunder, and Wachovia released the Wachovia Letter of Credit;

WHEREAS, pursuant to a Commercial Note dated as of February 20, 2008 (as the same may be amended pursuant to its terms from time to time, the “Paragon Loan Agreement”) between the Company and Paragon Commercial Bank, a North Carolina bank (“Paragon”), Paragon has made available to the Company a revolving line of credit in a maximum principal amount of $2,470,000.00 (the “Paragon Revolving Line”);

WHEREAS, to induce Paragon to enter into the Paragon Loan Agreement and make the Paragon Revolving Line available to the Company, and to provide security under the Paragon Loan Agreement for the payment of the Paragon Revolving Line, the Company requested that Atlas direct the Letter of Credit Provider to issue an irrevocable, direct-pay letter of credit to Paragon;

WHEREAS, pursuant to the Amendment to the Original Reimbursement Agreement, effective as of February 20, 2008 (the “First Amendment”), Atlas agreed to direct the Letter of Credit Provider to issue an irrevocable, direct-pay letter of credit to Paragon substantially in the form of Exhibit A attached to the First Amendment (as the same may be amended from time to time, the “Paragon Letter of Credit”), subject to the Company and Atlas amending the Original Reimbursement Agreement to provide for reimbursement by the Company in the event any amount is drawn and paid under the Paragon Letter of Credit;

WHEREAS, the Company and Atlas are parties to a Convertible Secured Subordinated Note Purchase Agreement, dated as of November 14, 2007, as amended through the date hereof (as so amended, the Note Purchase Agreement”), which entitles the Company to elect to sell convertible promissory notes described therein (“Convertible Notes”) to certain investors, including Atlas, the holder of a majority of the outstanding principal amount of Convertible Notes, subject to certain conditions, including (a) the condition that no event has occurred or condition exists which could reasonably be expected to have a Material Adverse Effect (as defined in the Note Purchase Agreement) on the ability of the Company to perform its obligations under the Note Purchase Agreement, and (b) the accuracy of the Company’s representation that no event has occurred that is reasonably likely to have a Material Adverse Effect on the Company remains true and correct;

WHEREAS, the agent (“Agent”) for the holders of Convertible Notes, including Atlas, has advised the Company that the Company’s obligations to Xxxxxx Xxxxxxx Xxxxx and Xxxx Xxxx Xxxxx, former officers of the Company who have asserted claims for advancement of expenses incurred by them in connection with their defense of certain criminal and civil actions, may constitute a Material Adverse Effect under the Note Purchase Agreement, whereby Atlas may determine that the funding conditions for future purchases of Convertible Notes have not been satisfied;

WHEREAS, Agent has further advised the Company that, in light of the foregoing, Atlas and other parties to the Note Purchase Agreement would be willing to waive the foregoing funding conditions under the Note Purchase Agreement relating to the claims of the Nouris if, and for so long as, the Nouris do not actively pursue enforcement of the existing judgment against the Company for such indemnification and advancement claims, or a settlement agreement reasonably acceptable to the Agent is entered into, and, in addition, the Reimbursement Agreement were amended to allow Atlas to elect to be reimbursed for any Letter of Credit drawdowns in either stock, bonds or cash, as Atlas may elect, in lieu of the Company making such election to pay in either stock or cash; and

WHEREAS, the Original Reimbursement Agreement, as previously amended by the First Amendment, is referred to as the “Reimbursement Agreement”. All capitalized terms used herein (including in the Recitals), unless otherwise defined herein, shall have the respective meanings ascribed thereto in the Reimbursement Agreement;

NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

Section 1. Amendment to Reimbursement Agreement.

(a) Section 2.2(c) of the Reimbursement Agreement is amended and restated in its entirety to read as follows:

“(c) At the election of Atlas, delivered by written notice to the Company, the Company shall pay any principal or interest amount due under this Section 2.2 in either (i) U.S. Dollars, (ii) common stock of the Company, or (iii) convertible reimbursement notes of the Company substantially in the form of Exhibit A hereto (the “Reimbursement Notes”), or any combination of the foregoing. In the event that Atlas requires the Company to pay in common stock of the Company, such stock shall be deemed to be valued at the conversion rate set forth in the Reimbursement Note.”

(b) Section 5.1 of the Reimbursement Agreement is amended and restated in its entirety to read as follows

“Notices. All demands, notices, approvals, consents, requests and other communications hereunder shall be in writing and shall be deemed to have been given when the writing is delivered, if given or delivered by hand, overnight delivery service or facsimile transmitter (with confirmed receipt), or three (3) Business Days after being mailed, if mailed by first class, registered or certified mail, postage prepaid, to the address or telecopy number set forth below:

If to the Company:	Smart Online, Inc.
	0000 Xxxxxxx Xxxxxxxxx Xxxxx 000
	Xxxxxx, Xxxxx Xxxxxxxx 00000
	Attention: Chief Executive Officer
	Fax No.: (000) 000-0000

with a copy to counsel:	Cohen, Tauber, Spievack & Xxxxxx P.C.
	000 Xxxxxxxxx Xxxxxx, Xxxxx 0000
	Xxx Xxxx, Xxx Xxxx 00000
	Attention: Xxxx Xxxxx
	Fax No.: (000) 000-0000

If to Atlas:	Atlas Capital SA
	000 Xxx Xx Xxxxx
	Xxxxxx, Xxxxxxxxxxx CH-1204
	Attention: Avy Xxxxxxx
	Fax No.: x000 00 0000 00000

The Company or Atlas may, by notice given hereunder, designate any further or different addresses or telecopy numbers to which subsequent demands, notices, approvals, consents, requests or other communications shall be sent or Persons to whose attention the same shall be directed.”

Section 2. Effect on the Reimbursement Agreement. Except as specifically amended above, the Reimbursement Agreement shall continue to be in full force and effect and is hereby in all respects ratified and confirmed.

Section 3. Controlling Law. This Second Amendment has been executed, delivered and accepted at, and shall be deemed to have been made in, the State of Delaware and shall be interpreted in accordance with the internal laws (as opposed to conflicts of laws provisions) of the State of Delaware, without regard to principles of conflicts of laws.

Section 4. Counterparts. This Second Amendment may be executed in several counterparts and by facsimile or other electronic transmission, each of which shall be an original and all of which together shall constitute but one and the same.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered as of the date first above written.

SMART ONLINE, INC.

By:	/s/ Xxxx Xxxxxx
Name:	Xxxx Xxxxxx
Title:	Interim Chief Executive Officer

ATLAS CAPITAL, S.A.

By:	/s/ Avy Xxxxxxx
Name:	Avy Xxxxxxx
Title:	Member of the Management

[Signature Page to Second Amendment to Reimbursement Agreement]

EXHIBIT A

FORM OF REIMBURSEMENT NOTE

THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THE COMPANY, IN ITS SOLE DISCRETION, SHALL HAVE THE RIGHT TO REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH ANY PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.

SMART ONLINE, INC.

CONVERTIBLE REIMBURSEMENT AGREEMENT PROMISSORY NOTE

$[_______________]

__________ __, 20__

Durham, NC

FOR VALUE RECEIVED, Smart Online, Inc., a Delaware corporation (the “Company”) promises to pay to Atlas Capital, SA (“Investor”), or its registered assigns, in lawful money of the United States of America the principal sum of [__________] Dollars ($[_________]), or such lesser amount as shall equal the outstanding principal amount hereof, together with interest from the date of this Note on the unpaid principal balance at a rate equal to 8.00% per annum, computed on the basis of the actual number of days elapsed and a year of 360 days. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on the “Maturity Date”, as such term is defined in the Company’s Convertible Secured Subordinated Promissory Notes issued pursuant to the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended, between the Company and the investors parties thereto.

This Note is issued pursuant to the Reimbursement Agreement, dated November 10, 2006, as amended through the date hereof (as so amended, modified or supplemented, the “Reimbursement Agreement”) between the Company and the Investor. Capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in the Reimbursement Agreement.

The following is a statement of the rights of Investor and the conditions to which this Note is subject, and to which Investor, by the acceptance of this Note, agrees:

1. Definitions. As used in this Note, the following capitalized terms have the following meanings:

(a) “Business Day” shall mean any day other than a Saturday or Sunday or other day on which the New York Stock Exchange is permitted or required by law to close.

(b) the “Company” includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of the Company under this Note.

(c) “Conversion Price” shall be calculated by multiplying 120% by the lowest of (i) the average of the high and low prices of the Common Stock on the OTC Bulletin Board averaged over the five (5) trading days prior to the Closing Date of the issuance of such Note, (ii) if the Common Stock is not traded on the Over-The-Counter market, the closing price of the Common Stock reported on the Nasdaq National Market or the principal exchange on which the Common Stock is listed, averaged over the five (5) trading days prior to the Closing Date of the issuance of such Note, or (iii) the closing price of the Common Stock on the OTC Bulletin Board, the Nasdaq National Market or the principal exchange on which the Common Stock is listed, as applicable, on the trading day immediately preceding the date such Note is converted (in each case as adjusted for stock splits, dividends or combinations, recapitalizations or similar events).

(d) “Change of Control” shall mean (i) any consolidation or merger or other transaction or series of transactions involving the Company pursuant to which the Company’s stockholders own less than fifty percent (50%) of the voting securities of the surviving entity (other than an equity financing) or (ii) the sale of all or substantially all of the assets of the Company.

(e) “Event of Default” has the meaning given in Section 4 hereof.

(f) “Obligations” shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to Investor of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note and the Reimbursement Agreement, including all interest, fees, charges, expenses, attorneys’ fees and costs and accountants’ fees and costs chargeable to and payable by the Company hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U. S. C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding.

(g) “Person” shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority.

(h) “Reimbursement Agreement” has the meaning given in the introductory paragraph hereof.

(i) “Securities Act” shall mean the Securities Act of 1933, as amended.

(j) “Transaction Documents” shall mean this Note and the Reimbursement Agreement.

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2. Interest. Accrued interest on this Note shall be payable in cash in quarterly installments commencing on the third month anniversary of the date of issuance of this Note with the final installment payable on the Maturity Date.

3. Prepayment. This Note may be prepaid in whole or in part at any time and from time to time without premium or penalty, but with accrued interest to the date of repayment on the amount repaid. Each partial repayment of this Note shall be applied first to accrued interest, then to principal.

4. Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note and the other Transaction Documents:

(a) Failure to Pay. The Company shall fail to pay (i) when due any principal or interest payment on the due date hereunder or (ii) any other payment required under the terms of this Note or any other Transaction Document on the date due and, with respect to this subclause (ii) only, such payment shall not have been made within five (5) days of the Company’s receipt of written notice to the Company of such failure to pay;

(b) Non-Performance of Affirmative Covenants. The Company shall default in the due observance or performance of any material covenant set forth in the Note or the Reimbursement Agreement, which default shall continue uncured for 15 days after receipt of written notice to the Company thereof;

(c) Voluntary Bankruptcy or Insolvency Proceedings. The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing;

(d) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 30 days of commencement;

(e) Misrepresentations. Any of the representations and warranties of the Company in the Reimbursement Agreement proves to have been false or misleading in any material respect when made or furnished or deemed made;

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(f) Judgments. One or more judgments, decrees or orders (excluding settlement orders) for the payment of money shall be entered against the Company or any of its subsidiaries involving in the aggregate a liability of $500,000 or more, and any such judgment, decree or order shall continue without discharge or stay for a period of sixty (60) days; or

(g) Cross-Defaults. The Company or any of its subsidiaries shall default in the performance or observance of any agreement or instrument relating to any indebtedness, or any other event shall occur or condition exist, and the effect of such default, event or condition is to cause or permit the holder or holders of any such indebtedness to cause indebtedness, in excess of $500,000 individually or in the aggregate, to become due prior to its stated maturity.

5. Rights of Investor upon Default. Upon the occurrence or existence of any Event of Default (other than an Event of Default described in Sections 4(c) or 4(d)) and at any time thereafter during the continuance of such Event of Default, Investor may, by written notice to the Company, declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. Upon the occurrence or existence of any Event of Default described in Sections 4(c) and 4(d), immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, Investor may exercise any other right power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both.

6. Conversion.

(a) Optional Conversion. At the Maturity Date, the Investor shall have the option to convert the entire principal amount of this Note then outstanding into Common Stock. The number of shares of Common Stock that this Note may be converted into shall be determined by dividing the principal amount then outstanding by the Conversion Price at the time of conversion. If the Investor elects to convert this Note at maturity, it shall provide the Company with written notice of its election at least one (1) day prior to the Maturity Date. Upon conversion, the Investor shall deliver to the Company the original of this Note (or a notice to the effect that the original Note has been lost, stolen or destroyed and an agreement reasonably acceptable to the Company whereby the holder agrees to indemnify the Company from any loss incurred by it in connection with this Note). However, upon such conversion of this Note, this Note shall be deemed converted and of no further force and effect, whether or not the Note is delivered for cancellation as set forth in the preceding sentence. If there shall occur a Change of Control, the Company shall give written notice to the Investor at least five (5) days prior to any closing thereof and the Investor’s election to convert this Note shall be conditional upon the consummation thereof.

(b) Mechanics of Optional Conversion. As soon as practicable following surrender by the Investor of the original of its Note, the Company shall issue and deliver to Investor a certificate or certificates for the shares of Common Stock into which the Note has been converted (bearing such legends as may be required or advisable in the opinion of counsel to the Company). Such conversion shall be deemed to have been made immediately prior to the close of business on the Maturity Date, and the Investor shall be treated for all purposes as the record holder or holders of such Common Stock on such date.

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(c) Fractional Shares; Interest; Effect of Conversion. No fractional shares shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to Investor upon the conversion of this Note, the Company shall pay to Investor an amount equal to the product obtained by multiplying the Conversion Price by the fraction of a share not issued pursuant to the previous sentence. Upon conversion of this Note in full and the payment of any amounts specified in this Section 6(c), the Company shall be forever released from all its obligations and liabilities under this Note.

7. Successors and Assigns. Subject to the restrictions on transfer described in Sections 9 and 10 below, the rights and obligations of the Company and Investor shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

8. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the Investor.

9. Transfer of this Note or Securities Issuable on Conversion Hereof. With respect to any offer, sale or other disposition of this Note or securities into which such Note may be converted, Investor will give written notice to the Company prior thereto, describing briefly the manner thereof, together with (unless waived by the Company) a written opinion of Investor’s counsel, or other evidence if reasonably satisfactory to the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Upon receiving such written notice and reasonably satisfactory opinion, if so requested, or other evidence, the Company, as promptly as practicable, shall notify Investor that Investor may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 9 that the opinion of counsel for Investor, or other evidence, is not reasonably satisfactory to the Company, the Company shall so notify Investor promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Subject to the foregoing, transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company. Prior to presentation of this Note for registration of transfer, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to the contrary. Notwithstanding anything in this Section 9 to the contrary, no opinion of counsel shall be required with respect to any transfer by Investor to its officers, directors, partners, members or other affiliates.

10. Assignment by the Company. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Investor.

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11. Notices. All notices, requests, demands, consents, instructions or other communications required or permitted hereunder shall in writing and faxed, mailed or delivered to each party at the respective addresses of the parties as set forth in the Reimbursement Agreement, or at such other address or facsimile number as the Company shall have furnished to Investor in writing. All such notices and communications will be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one Business Day after being delivered by facsimile (with receipt of appropriate confirmation), (iv) one Business Day after being deposited with an overnight courier service of recognized standing or (v) two days after being deposited in the U.S. mail, first class with postage prepaid.

12. Pari Passu Notes. Investor acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Notes issued pursuant to the Reimbursement Agreement or pursuant to the terms of such Notes.

13. Usury. In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note.

14. Waivers. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument.

15. Remedies Cumulative. The remedies of Investor as provided herein and in the Reimbursement Agreement and in any other documents governing repayment hereof shall be cumulative and concurrent and may be pursued singly, successively, or together, at the sole discretion of Investor to the extent provided herein and in the Reimbursement Agreement and may be exercised as often as occasion therefore shall arise. No act or omission of the Investor, including specifically, but without limitation, any failure to exercise any right, remedy or recourse, shall be effective as a waiver of any right of the Investor hereunder, unless set forth in a written document executed by the Investor, and then only to the extent specifically recited therein. A waiver or release with reference to one event shall not be construed as continuing, as a bar to, or as a waiver or release of any subsequent right, remedy or recourse as to any subsequent event.

16. No Rights of a Stockholder. Nothing contained in this Note shall be construed as conferring upon the Investor or any other Person the right to vote or consent or to receive notice as an stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company prior to the time that this Note is converted pursuant to Section 6.

17. Governing Law. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law provisions of the State of Delaware, or of any other state.

(Signature Page Follows)

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The Company has caused this Convertible Reimbursement Agreement Promissory Note to be issued as of the date first written above.

SMART ONLINE, INC.

a Delaware corporation

By: ___________________________

Name: _________________________

Title: __________________________

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SECOND AMENDMENT TO REIMBURSEMENT AGREEMENT

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